Indian LNG Buyers Embrace US Benchmark to Balance Volatility
(Bloomberg) -- Indian liquefied natural gas importers have signed a flurry of long-term purchase agreements linked to the US price benchmark, the latest effort by the nation’s buyers to protect themselves from volatile markets.
State-owned companies have signed at least four contracts since December, totaling nearly 11 million tons per year, priced to the Henry Hub index, according to the executives familiar with the deals. Until now, most of India’s long-term contracts have been linked to crude oil, the traditional way to price LNG deals.
Pricing the fuel to the Henry Hub index doesn’t necessarily mean that the fuel will come from the US, rather it is a move to hedge risk.
India’s consumers — from power plants to petrochemical facilities — are highly price-sensitive as gas competes head-to-head with cheaper and dirtier alternatives. Companies that relied on the spot market or oil-linked contracts have periodically been forced to cut back purchases due to price spikes.
US gas futures have also been relatively less volatile and more liquid than the Asian spot benchmark, the Japan-Korea Marker.
“The last ten year average shows that there have been periods during winter months JKM benchmark surged beyond imagination, while Henry Hub prices saw proportionally smaller growth,” Bharat Petroelum Corp Ltd’s Director Finance V.R.K. Gupta said.
BPCL in February signed a deal with ADNOC Trading for 2.5 million tons of LNG for five years. The Mumbai-based refiner will evaluate the performance of the deal and may sign more such contracts, Gupta said.
Indian Oil Corp. last week signed a deal with Trafigura for 2.5 million tons, or 27 cargoes, spread over five years, with supplies starting the middle of this year.
The recent deals have been signed at a 115% link to Henry Hub plus $5 to $6 per million British thermal units. The supply is for delivery directly to India and includes the cost of shipping.
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